Monthly Archives: May 2010

Why Our Bear Rally Might Fizzle Out

Is the housing market ready to survive without government props and supports? We are about to find out.

Irvine Home Address … 2 SANTA LUZIA AISLE Irvine, CA 92606

Resale Home Price …… $699,000

{book1}

Don't you know me I'm the boy next door

The one you find so easy to ignore

Is that what I was fighting for?

Walking on a thin line

Straight off the front line

Labeled as freaks loose on the streets of the city

Walking on a thin line

Angry all the time

Take a look at my face, see what it's doing to me

Huey Lewis and the News — Walking on a Thin Line

To all of you who served in the armed forces: thank you. Your sacrifice does not go unnoticed.

I hope everyone is enjoying this Memorial Day holiday.

And now, back to real estate…

The bust's second act

May 25th 2010, 15:12 by R.A. | WASHINGTON

FOR a brief moment last fall, it looked as though the American housing sector might not be the persistent economic drag economists had feared. Home prices and sales leveled off and began climbing. Construction did the same. In the third and fourth quarter of last year, residential investment was a minor but positive contributor to American output growth. Buoyed by a generous homebuyer tax credit and mortgage rates held down by Federal Reserve purchases, housing markets seem poised for stability, if not a new boom in activity.

But the good times haven't lasted. Construction and builder confidence have weakened once again. The latest data on existing home sales show a spike in activity and the best April performance since 2006. But this was almost certainly due to the looming end of the federal tax credit. Sales also rose and spiked before and immediately after the previous deadline, last fall, only to decline again through the winter. More worrying still, the previous spike in sales coincided with a decline in housing inventory. This time, inventories have risen dramatically. Even as the end of government incentive programmes lead buyers to exit the market, the number of homes for sale will have grown significantly.

And so it's not surprising that prices have also been falling again. According to the Federal Housing Finance Agency, home prices declined 1.9% from the fourth quarter of 2009 to the first quarter of 2010. Prices were up 0.3% in March, according to the FHFA data, but the general trend is not encouraging. The latest Case-Shiller home price figures are similarly disappointing. Both of the Case-Shiller national indexes had declined for six consecutive months, through March. Only two of the individual markets, San Diego and San Francisco, saw a rise in home values in the first quarter. Total declines from last fall's price peak haven't been catastrophic. But they are troubling. Nearly a quarter of all mortgage borrowers remain underwater on their home loans. In the first quarter, the share of prime loans that were delinquent or in foreclosure rose sharply. That's bad for housing inventory, bad for home prices, and bad for the residential investment outlook.

These trends are the more worrisome given the end of the homebuyer tax credit and of Fed purchases of mortgage-backed securities. Just this week, the head of the Federal Housing Administration declared that, "This is a market purely on life support, sustained by the federal government…having FHA do this much volume is a sign of a very sick system.” The federal government may come to regret its decision to focus on measures aimed at encouraging sales, rather than on efforts to deal with negative homeowner equity. The latter issue has made for a steady-stream of foreclosed-upon housing inventory, too substantial to be absorbed by new buyers. And so with government measures winding down, the housing bust is free to carry on as before.

It is unlikely (though not impossible) that prices will plummet once more; price declines are likely to be small relative to those experienced in 2008 and 2009. But small declines are enough to do damage. Four years after the housing boom reached its apex and the bust began, and end to the mess remains just out of reach.

Delaying the decline

If justice delayed is justice denied, what is a market bust delayed? For as ominous as the signs are for our market, prices locally will likely continue to rise for the near term. Lenders have constricted inventory by failing to approve short sales and failing to foreclose on delinqent borrowers. With interest rates below 5% again, payment affordability is good. Until more product is released to the market or interest rates go up, prices will hold steady or rise. Unless lenders consider squatting a permanent solution to the problem, this product will come to the market, and it will impact pricing. it is only a matter of time.

Auction with equity

Today's featured property is a rarity in the trustee sale market since the crash: and equity owner who did not sell prior to auction.

The property was purchased on 4/15/2003 for $490,000. The owner used a $392,000 first mortgage and a $98,000 down payment. On 1/13/2005 he opened a $100,000 HELOC, but there is no indication that he used it. Then he defaulted:

Foreclosure Record

Recording Date: 05/26/2009

Document Type: Notice of Sale

Foreclosure Record

Recording Date: 02/18/2009

Document Type: Notice of Default

I looks like they gave him about nine months after the NOT was filed before they actually went to auction. It isn't known why the owner did not sell and obtain his equity during that time.

The opening bid at auction was about $416,833.94. It was quickly bid up to $596,000. It is being flipped for a quick profit.

Irvine Home Address … 2 SANTA LUZIA AISLE Irvine, CA 92606

Resale Home Price … $699,000

Home Purchase Price … $596,000

Home Purchase Date …. 3/16/2010

Net Gain (Loss) ………. $61,060

Percent Change ………. 17.3%

Annual Appreciation … 65.5%

Cost of Ownership

————————————————-

$699,000 ………. Asking Price

$139,800 ………. 20% Down Conventional

4.87% …………… Mortgage Interest Rate

$559,200 ………. 30-Year Mortgage

$142,600 ………. Income Requirement

$2,958 ………. Monthly Mortgage Payment

$606 ………. Property Tax

$225 ………. Special Taxes and Levies (Mello Roos)

$58 ………. Homeowners Insurance

$151 ………. Homeowners Association Fees

============================================

$3,998 ………. Monthly Cash Outlays

-$719 ………. Tax Savings (% of Interest and Property Tax)

-$688 ………. Equity Hidden in Payment

$262 ………. Lost Income to Down Payment (net of taxes)

$87 ………. Maintenance and Replacement Reserves

============================================

$2,940 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$6,990 ………. Furnishing and Move In @1%

$6,990 ………. Closing Costs @1%

$5,592 ………… Interest Points @1% of Loan

$139,800 ………. Down Payment

============================================

$159,372 ………. Total Cash Costs

$45,000 ………… Emergency Cash Reserves

============================================

$204,372 ………. Total Savings Needed

Property Details for 2 SANTA LUZIA AISLE Irvine, CA 92606

——————————————————————————

Beds: 3

Baths: 2 full 1 part baths

Home size: 1,678 sq ft

($417 / sq ft)

Lot Size: 3,161 sq ft

Year Built: 1996

Days on Market: 40

Listing Updated: 40289

MLS Number: S614144

Property Type: Single Family, Residential

Community: Westpark

Tract: Rave

——————————————————————————

Gorgeous Home in Westpark. Upgraded Marble in entrance. Walking distance to school & park. Custom Window Covering. Mirrored walk-in closet door. Cathedral-vaulted ceilings. New Paint. Move-in ready.

.

I will not be participating in the comments today. It is my tenth wedding anniversary, and I will be be spending the day out with my family.

Ten years in, and I love my wife more than the day we were married. I am looking forward to the next ten and many more.

Preventing the Next Housing Bubble – Part 1

Preventing the Next Housing Bubble

The pain of the deflation of a housing bubble cannot be avoided by trying to keep the bubble inflated, or by trying to deflate it slowly. The only way to avoid these problems is to prevent the bubble from inflating in the first place through some form of intervention in the mortgage market. Intervention can take the form of a market-based intervention demanded by investors and ratings agencies, and it can also come about through direct government regulation.

Necessary Intervention

The regulated free-market system in place at the turn of the millennium allowed the creation of the Great Housing Bubble. Some combination of market-based and regulatory reforms is necessary to prevent the same circumstances that created the bubble from creating another one; it is imperative to prevent the next bubble in order to avoid the problems from the bubble’s deflation. [iii] The kind of intervention proposed here is not a bailout plan. A substantive bailout plan to rescue homeowners would be fraught with problems and unintended consequences. In September of 2008, the banking system neared collapse due to the problems of the fallout, and a banking system bailout became necessary. This outcome argues more forcefully for an intervention to prevent future bubbles from occurring in the housing market.

Economic Problems

The foremost problem resulting from the deflation of the Great Housing Bubble was the imperilment of our banking and financial system. The Great Depression was precipitated by the collapse of margin trading and the subsequent decline of the stock market beginning in 1929; however, this decline is not what made the Great Depression so severe. The policies responding to the upheaval caused many banks to fail, and it was the failure of banks that led to the dramatic decline in business activity and asset deflation of the Great Depression. To prevent a repeat of those problems, Congress passed a number of banking reforms granting the Federal Reserve broad powers over our currency and effectively abandoned the gold standard. One of the most successful of these policies was the establishment of the Federal Deposit Insurance Corporation (FDIC) to guarantee the safety of deposits in banking institutions and prevent panic-induced, mass depositor withdrawals (aka “bank runs”) from decimating our banking system. Since the FDIC has been in effect, mass depositor withdrawals at American banks have been relatively uncommon. Just as the deflation of the stock market asset bubble of the Great Depression imperiled the banking system, the deflation of the Great Housing Bubble endangered the banking system because the bank losses were so severe that most became insolvent and many went bankrupt or were taken over by other lenders. Whenever the banking system is put in jeopardy, economic growth is curtailed, and other major economic problems develop.

Another source of economic problems caused by housing market bubbles is the immobility of workers. These problems were witnessed in the deflation of the coastal bubble during the early 1990s, and they occurred again in the deflation of the Great Housing Bubble. When people owe more on their mortgage than their house is worth, they could not move freely to accept promotions or work in other areas. In such circumstances the borrower had limited options. The borrower could have tried to rent the property, but those who bought at bubble prices paid in excess of its rental value so renting the property did not cover the costs of ownership. They were losing money each month trying to keep the house. If they tried to sell the house to avoid the monthly loss, they could not get enough money in the sale to pay off the debt. The borrower would either pay the lender the difference or accept the negative consequences of a short sale or foreclosure. Most often they chose the latter option. Since none of the options available to borrowers were very palatable, many passed on promotions or other opportunities because they were trapped in their homes. Employers also faced difficulties when house prices were much higher than local incomes. When an employer wanted to expand and hire new people, the potential new employee was repelled by the high house prices and either demanded a higher wage or refused to accept employment. Both circumstances were detrimental to the economy when an employee was trapped in their home and could not move and when an employer could not attract new employees because local house prices were very high.

Like all financial bubbles, the bubble in residential real estate caused the inefficient use of capital resources. When prices rose, it signified an increase in demand, and the supply chain went to work to deliver more supply to meet this demand and capture the profits from increased prices. When the demand was artificial, as was the case in a bubble, the market became oversupplied, and this supply was not of the type or quantity the market really needed. For instance, in the NASDAQ stock market bubble, billions of dollars of investment capital flowed into internet companies. This money went into all forms of unproductive uses which ultimately provided little or no return on the investment capital. In the Great Housing Bubble, the inflated prices prompted builders to construct many large houses known as McMansions. The economics favored this because the largest homes had the lowest cost per-square-foot to construct, and these houses obtained some of the highest revenues per-square-foot on the market. The result was entire neighborhoods of homes that were very resource wasteful. If the construction resources had been allocated based on true market need, which would have happened in the absence of price bubble distortions, fewer construction resources would have gone into each home, the ongoing cost of maintenance would have been reduced, and fewer total homes would have been built. The temporary demand of construction resources in a financial bubble also impacted human resources. There was a nationwide increase in construction employment to meet the bubble demand. When the bubble burst, many of these people were laid off causing both economic and personal turmoil.

Financial bubbles also witnessed the birth, growth and death of unsustainable financial models. The NASDAQ bubble had internet companies, and the Great Housing Bubble had subprime lending. The subprime lending model was profitable despite a 10% to 15% default rate among its customers. The industry was able to sustain this rate of default because the default losses they sustained were small as long as prices were rising. As soon as prices stopped rising, their loan default rates increased, and their default losses drove the entire industry into oblivion. [iv]

In the aftermath of the coastal housing bubble of the early 90s, the economy experienced a period of diminished consumer spending because many homeowners who bought during the bubble and did not go into foreclosure were making payments that represent a high percentage of their income. The extra money going toward their mortgage payment, the money in excess of normal debt-to-income guidelines was money the borrower did not have available to spend on other things. The diminished discretionary spending income from this population of borrowers slowed economic growth in an economy heavily dependent upon consumer spending such as the United States. [v] Many borrowers during the Great Housing Bubble became accustomed to supplementing their income through mortgage equity withdrawal. When house prices fell, mortgage equity withdrawal was curtailed. This forced many to adjust their lifestyles to live within the money provided by their wage incomes after paying the large debt-service payments. This loss of spending power was not just a difficult economic problem, it was a deeply personal problem for those who wished to spend freely.

Personal Problems

The economic problems caused by asset price bubbles often lead to personal problems in the wake of the deflating bubble. Statistics about unemployment, foreclosure and bankruptcy are impersonal. The events that result in any one of these outcomes was anything but impersonal: these things happened to real people who had very real emotional responses. Many people during the fallout of the Great Housing Bubble experienced all three. Any one of these outcomes can lead to depression, suicide, divorce and a whole host of traumatic personal problems. All of it was preventable if the bubble was not allowed to inflate in the first place.

The volatility of price action during a bubble had a profound and capricious impact on people’s financial lives. Many people became enriched by fortuitous timing. Some of these people were market savvy individuals who knew when to buy and sell in a volatile market; however, since the mindset of a successful trader was rare, and since most housing market participants were amateurs with emotional responses almost guaranteed to produce a loss, the majority of bubble participants lost a great deal of money. Some were lucky. Some people bought and sold at the right time due to life circumstances beyond their control. Those who transferred out of bubble markets for their careers and sold their houses at the peak reaped huge windfalls. Of course, for every seller who reaped a windfall, there was a buyer who faced major financial difficulties. The unequal distribution of gains and losses from bubble market volatility is not a positive feature.

Another group of people deeply impacted by bubble market volatility are those who chose not to participate. Some of these people recognized the bubble for what it was, and some could not set aside common sense to accept the fallacious beliefs of bubble mentality. This group was forced to rent during the bubble and subsequent decline. Many of these people would have preferred ownership, preferred to have the freedom to customize a property to their liking, and preferred to obtain the intangible benefits of ownership such as a feeling of community and belonging. These people had to endure the patient “waiting game” and feelings of groundlessness renting can entail.

Addressing the Cause

Before a doctor prescribes a treatment, the patient must first be evaluated and a disease must be diagnosed. Similarly, implementing a new policy in either the public sector or private sector to prevent future housing bubbles can only take place after the causes of the housing bubble are accurately identified. If the root causes are not identified correctly, policy initiatives may not have the desired effect. The Great Housing Bubble was a credit bubble, and some form of restriction of credit must be part of any policy initiative. A common criticism of past initiatives restricting credit availability to homeowners is that these initiatives tended to limit opportunities for home ownership without properly addressing problems with lending practices. [vi] The goal of any policy initiative with regards to preventing future housing bubbles is to limit or constrain irrational exuberance without impacting the smooth operation of the financial market. It is no easy task.

Before a policy can be formulated, there needs to be an open discussion of the goal of maximizing home ownership. Owning a home has become synonymous with the American Dream. Every Presidential administration has had the expansion of home ownership as one of its goals. The tax code is structured to give tax breaks to home owners to encourage home ownership. The idea of home ownership is deeply embedded in our culture.

Managing the rate of home ownership is analogous to managing the rate of economic growth. It is not the policy of our government or the Federal Reserve to maximize economic growth. Instead, the Federal Reserve balances economic growth with inflation and tries to manage economic growth to keep it on a sustainable path. This policy grew out of our painful history of economic cycles of boom and bust. It was realized that economic growth must be tempered to a sustainable level to minimize the damage of economic downturns. Similarly, the rate of home ownership should not be maximized. Home ownership will never reach 100%, and this should not be the goal of housing policy. Just as economic growth is tempered by the rate of inflation, home ownership rates are tempered by the rate of default of mortgage loan programs.

The harsh reality is that a certain percentage of the population lacks the desire, discipline or responsibility requisite to be a homeowner. There is a percentage of the population who do not want to be homeowners. Many people require mobility to pursue career opportunities or other goals. Some people like the freedom of renting and do not want the responsibilities of home ownership that go beyond monthly payments. There are some people who simply do not make housing payments consistently. This group is not capable of sustaining home ownership. There may be opportunities for policy initiatives to increase education to make this group smaller, but there will always be some people who cannot or will not do what is necessary to keep a house: make their payments. There is a percentage of the general population who should be renters.

There is a natural, sustainable level of home ownership. Home ownership rates in the United States increased markedly at the end of World War Two as the 30-year fixed-rate mortgage became the commonly accepted vehicle of home finance. In the 60 years that followed, home ownership rates stabilized between 60% and 65% through good economic times and recessions and interest rates ranging from below 6% to above 18%. Subprime lending demonstrated that increasing the home ownership rate through the widespread use of lending programs with high default rates is inherently unstable. Managing the home ownership rate is not a subject of governmental policy. Any legislative initiative to specifically limit home ownership rates would be politically unpalatable; however, either a market-based initiative or a legislative initiative that prevents the widespread use of loan programs subject to high rates of default rates would effectively manage the home ownership rate and prevent painful declines in that rate. Home ownership rates decline as homeowners become renters, a painful process known as foreclosure.

What did not cause the bubble?

There are a wide variety of ideas for preventing future housing bubbles, and all the ideas in the public forum are not discussed here. Some of the more popular are examined to demonstrate why they would not be successful. Most of the ideas that will not work are some form of direct regulation of interest rates, secondary mortgage market activities, price-to-income ratios or investment of equity capital. All regulatory initiatives carry a common problem: there is little enforcement once a bubble starts inflating. When times are good, there is immense political pressure for regulators to look the other way. When there is no apparent, immediate harm from a given practice, there is only a vague memory of a time long ago when circumstances were quite different and some restrictive law was passed. The law may seem quaint and old-fashioned or simply an obstruction to the wheels of progress. The rationalizations and justifications for ignoring laws are many, and the pressure to do so is intense when powerful lobbying interests are pressuring Congressmen who subsequently pressure government regulators.

Many believe that lower interest rates created the Great Housing Bubble, and the regulation of interest rates would prevent future bubbles. This is wrong on both counts. The lowering of interest rates did help precipitate the bubble by reducing borrowing costs and increasing home prices; however, once house prices started to rise, prices went much higher than the lower interest rates alone can account for. At most, one-third to one-half of the national price increase was due to lower interest rates, and less than 10% of the increase in coastal areas can be attributed to these lower rates. The direct regulation of mortgage interest rates would disrupt the free flow of capital in the mortgage market. If the regulated rate was too low, no money would be made available, and if the rate was too high, excess money would flow into real estate working to create another bubble. No form of mortgage interest rate regulation would prevent a future bubble because interest rates were not responsible for the Great Housing Bubble.

Much of the responsibility for the bubble can be attributed to the flow of funds into the market from hedge funds through collateralized debt obligations. There have also been calls for greater regulation of hedge funds and the secondary mortgage market. Any kind of regulation would likely restrict the flow of money to all mortgages and disrupt the secondary market. Also, regulating hedge funds themselves will prove problematic, if for no other reason, it is difficult to define exactly what a hedge fund is. Also, hedge funds are simply investment vehicles, and it is unclear exactly what they do that other investment entities do not do that causes problems resulting in financial bubbles. Much of the demonization of hedge funds is demagoguery and looking for someone to blame. Many of the problems with the secondary markets will correct themselves as investors stop investing in products that lose money. In fact, one of the greatest challenges in the aftermath of the Great Housing Bubble is going to be getting investors back into the secondary market. One of the market-based solutions proposed herein addresses these issues. Direct legislative intervention to hedge funds and collateralized debt obligations would be more disruptive than productive.

Another proposed solution is to regulate the loan-to-income ratio of the borrower. When 30-year fixed-rate mortgages first came out, mortgage debt was limited to two and one-half times a borrower’s yearly income. It was an artificial limit that made sense when interest rates were higher and people were accustomed to putting less money toward housing payments. A legislative cap on the loan-to-income ratio would prevent future housing bubbles, if it was enforced. This would not work for the same reason lenders went away from the two-and-one-half-times-income standard years ago: it does not reflect changes in borrowing power due to changes in interest rates. This idea of regulating loan-to-income ratios is actually an evolution of the idea of regulating interest rates. If the total loan-to-income ratio is limited, very low interest rates do not cause dramatic price increases, but since low interest rates were not really the cause of the bubble, limiting the loan-to-income ratio is not addressing the real cause of the bubble. Plus, there are ways to get around a cap on home loan borrowing by obtaining other loans not secured by real estate. It would be relatively easy for a borrower to obtain bridge financing to acquire a property and then obtain a HELOC to pay off the bridge financing. In the end, the borrower would have borrowed more than the cap amount thus rendering any cap meaningless. To close the various loopholes, more regulations would be required, and a regulatory nightmare would ensue. A better and more effective method of limiting borrowing is to regulate the debt-to-income ratio. This idea is explored in the next section.

What did cause the bubble?

The Great Housing Bubble was caused by an expansion of credit that enabled irrational exuberance and wild speculation. The expansion of credit came in the form of relaxed loan underwriting terms including high debt-to-income ratios, lower FICO scores, high combined-loan-to-value lending including 100% financing, and loan terms permitting negative amortization. Addressing the conditions of expanding credit is a legitimate focus for intervention in the credit markets. Another major lending problem is unrelated to the terms: low documentation standards. The credit crunch that gripped the markets in late 2007 was exacerbated by the rampant fraud and misrepresentation in the loan documents underwriting the loans packaged and sold in the secondary mortgage market. It is essential to an evaluation of the viability of a mortgage note to know if the borrower actually has the income necessary to make the payments. When investors lost confidence in the underlying documents, the whole system seized up, and it was not going to work properly until the documentation improved to reflect the reality of the borrower’s financial situation. Any remedy for the housing bubble must address the issue of poor documentation in order to facilitate the smooth operation of the secondary market.

There are some factors that created the Great Housing Bubble that cannot be directly regulated. One of these is the lax enforcement of existing regulations as described previously. Even though lenders and investors lost a great deal of money during the price crash, their behavior during the bubble was still predatory. Lenders peddled unstable loan programs to borrowers who could not afford the payments. They did not do this to obtain the property as is ordinarily the case with predatory lending; they did it to obtain a fee through loan origination. Since they felt insulated from the losses to these loans being packaged and sold to investors, they were in a position to profit at the expense of borrowers–the definition of predatory lending. Another factor that cannot be regulated is the crazy behavior of borrowers caught up in a speculative mania. It is not possible to stop people from overpaying for real estate, but it is possible from preventing them from doing so with borrowed money. If people wish to risk their own equity in property speculation, it is their money to lose, but when lender money is part of the equation, the entire financial system can be put at risk, which it was during the Great Housing Bubble. The fickle nature of borrowers became apparent during the decline of the bubble when many borrowers behaved in a predatory manner refusing to make payments on loans they could have afforded to make because the property had declined in value. Borrowers who were grateful to receive 100% financing and what was perceived at the time to be favorable loan terms were not hesitant to betray the lenders when their speculative investment did not go as planned.

The 30-year fixed-rate conventionally-amortizing mortgage with a reasonable downpayment is the only loan program proven to provide stability in the housing market. Many of the “affordability” products used during the Great Housing Bubble and many of the deviations from traditional underwriting standards created the bubble. Mortgage debt-to-income ratios greater than 28% and total indebtedness greater than 36% have a proven history of default. Despite this fact, debt-to-income ratios greater than 50% were common in the most extreme bubble markets. [vii] Limiting debt-to-income ratios is critical to stopping loan defaults and foreclosures. Lower FICO scores was the hallmark of subprime lending. FICO scores provide a fairly accurate profile of a borrower’s willingness and ability to pay their debts as planned. Low FICO scores are synonymous with high default rates. Limiting availability of credit to those with low FICO scores was a historic barrier to home ownership because these people default too much. The free market solved this problem. Subprime was dead. High combined-loan-to-value (CLTV) lending including 100% financing is also prone to high default rates. In fact, it is more important than FICO score. FICO scores are very good at predicting who will default when downpayments are large, but when borrowers have very little of their own money in the transactions, both prime and subprime borrowers defaulted at high rates. Many prime borrowers are more sophisticated financially, and the unscrupulous recognized 100% financing as a perfect tool for speculating in the real estate market and passing the risk off to a lender. The primary culprits that inflated the housing bubble were the negative amortization loan and interest-only loans where lenders qualified buyers on their ability to make only the initial payment. As the Great Housing Bubble began to deflate, Minnesota and some other states passed laws restricting the use of negative amortization loans and required lenders to qualify borrowers based on their ability to make a fully amortized payment. The Minnesota law is a good template for the rest of the nation.

Any proposal to prevent bubbles from reoccurring in the residential real estate market must properly identify the cause, provide a solution that is enforceable, and allow for the unhindered working of the secondary mortgage market. The solutions outlined below are both market-based, meaning it does not require government regulation, and regulatory based, meaning it entails some form of civil or criminal penalties to prevent certain forms of behavior leading to market bubbles. All changes are difficult to implement and the solutions presented here would be no exception. Any policies which prevent future bubbles will be opposed by those who profit from these activities and homeowners who are in need of the next bubble to get out of the bad deals they entered during the Great Housing Bubble. Despite these difficulties, it is imperative that reform take place, or the country may experience another housing bubble with all the pain and financial hardship it entails.

Market Solutions

The secondary mortgage market was created in the 1970s by the government sponsored entities, Freddie Mac, Fannie Mae, and Ginnie Mae. This market was expanded by the creation of asset-backed securities where mortgage loans are packed together into collateralized debt obligations (CDOs). This flow of capital into the mortgage market is a necessary and efficient tool for delivering money to borrowers for home mortgages. This market must remain viable for the continued health of residential real estate markets. The problem during the Great Housing Bubble was that the buyers of CDOs did not properly evaluate the risk of loss through default on the underlying mortgage notes that were pooled. The reason these risks were not evaluated properly is due to the appraisal methods used to value real estate serving as collateral backing up these loans.

There is one potential market-based solution that would require no government regulation or intervention that would prevent future bubbles from being created with borrowed capital: change the method of appraisal for residential real estate from valuations based exclusively on the comparative-sales approach to a valuation derived from the lesser of the income approach and the comparative-sales approach. Both approaches are already part of a standard appraisal, so little additional work is necessary–other than appraisers will have to focus on doing the income approach properly. In the current lending system, the income approach is widely ignored. This change of emphasis in valuation methods could come from the investors in CDOs themselves. When the fallout from the Great Housing Bubble is evaluated, it is clear that the comparative-sales approach simply enables irrational exuberance because the past foolish behavior of buyers becomes the basis for future valuations allowing other buyers to continue bidding up prices with lender and investor money. Prices collapsed in the Great Housing Bubble because prices became greatly detached from their fundamental valuation of income and rent. This occurred because the comparative-sales approach enables prices to rise based on the irrational exuberance of buyers. If lenders would have limited their lending based on the income approach, and if they would not have loaned money beyond what the rental cashflow from the property could have produced, any price bubble would have to have been built with buyer equity, and lender and investor funds would not have been put at risk. There is no way to prevent future bubbles, and the commensurate imperilment of our financial system, as long as the comparative-sales approach is the exclusive basis of appraisals for residential real estate.

Investor confidence in the market for CDOs and all mortgages was shaken during the decline of the Great Housing Bubble–and rightly so. Investors were losing huge sums, and nobody clearly understood why. There was a widespread belief these losses were caused by some outside factor rather than a systemic problem enabled by the lenders and investors themselves. [viii] For investor confidence to return to this market, investors must first ascertain a more accurate evaluation of potential losses due to mortgage default. This requires an accurate appraisal of the fundamental value of the residential real estate serving as collateral for the mortgage loans that comprise the CDOs. Since the fundamental value of residential real estate, the value to which prices ultimately fall during a price decline, is determined by the potential for rental income from the property, revaluing properties using the income approach would provide a more accurate measure of the value of the mortgage note and thereby the CDO.

The ratings agencies who rate the various tranches of CDOs must adopt the method of valuation utilizing the lesser value of the income approach and the comparative-sales approach. The ratings agency’s recommendations and ratings carry significant weight with investors, and the ratings agencies clearly made a tragic error in their ratings of CDOs during the Great Housing Bubble. If the ratings agencies properly evaluate the underlying collateral backing up the mortgages that are pooled together in a CDO, investors will regain confidence in the ratings, and money will return to the secondary market. If investors in CDOs recognize the chain of valuation as described, they would be unwilling to purchase CDOs valued by other methods. If investors are unwilling to purchase CDOs where the underlying collateral value is measured using the comparative-sales approach and instead demand a valuation based on the income approach, the syndicators of CDOs will be forced to respond to investor demands or they will not be able to sell their syndications. Investors and the ratings agencies can mandate a new valuation method for residential home mortgages.

In September of 2008, the Federal Government took “conservatorship” of the GSEs responsible for maintaining the secondary mortgage market. With the collapse of the asset-backed securities markets and CDOs, the GSE swaps were the only viable market for mortgage paper. This provides a unique opportunity for changing the market dynamics with limited government intervention. If the government in its role as conservator were to decide to mandate a change in appraisal methods, the secondary market would be forced to accept this change. Like any sweeping change in methodology, it could be phased in over time to properly train appraisers and work out the details of implementation. If the GSEs lead, the rest of the market will follow.

The main objection with the income approach is the difficulty of evaluating market rents, particularly in markets where there may not be many (or any) comparative properties for rent in the market. This is an old problem, one that has been studied in great detail by the Department of Labor Bureau of Labor Statistics. [ix] Comparative rents have been collected by the DOL since the early 1980s as part of their calculation of the Consumer Price Index. The problem of irrational exuberance in the late 1970s in coastal markets, particularly California, caused the consumer price index to rise rapidly. Since the CPI is widely used as an index for cost-of-living adjustments, volatility in this measure caused by the resale housing market needed to be urgently addressed. After over a decade of study, the DOL decided to value the change in housing costs by a comparative rental approach rather than a change in sales price approach used previously. This smoothed the index and reduced volatility because the consumptive aspect of housing services were tethered to rents and incomes rather than being subject to the volatility caused by irrational exuberance in the housing market.

The Department of Labor Bureau of Labor Statistics measures the market rental rate in markets across the United States. It breaks down the market into subcategories based on the number of bedrooms, and it does a good job of estimating market rents in the various subcategories. These numbers are updated each year. The figures from the DOL would serve as a basis for evaluation of market rents, and it may be the only basis in areas where there are few rentals. In submarkets where there is sufficient rental activity, the income approach can use real comparables to make a more accurate evaluation. Appraisers will decry the lack of available data on rentals as many rentals, particularly for single-family detached homes are done by private landlords who do not report these transactions; however, if this method of appraisal were the standard, private companies would spring up to track these transactions and maintain an up-to-date database. Valuing properties based on the income approach may be more difficult than the comparative-sales approach, but when the latter method is fundamentally flawed, ease-of-use is not a compelling reason to continue to rely on it.

There is also the objection that the income approach method of valuing residential real estate has the same problems as the comparative-sales approach because both approaches rely on finding similar properties and making an estimation of market value by adjusting the values of comparative properties. In both approaches the appraiser must explain their reasons for the adjustments to justify the appraised value of the subject property, and this is a potential source of abuse of the system. No system is perfect, but the potential to inflate prices though manipulating appraisals based on the income approach is far less than the potential problems emanating from the comparative-sales approach because the basis of adjustment in the income approach is a property's fundamental value whereas the basis of adjustment in the comparative-sales approach is the prices paid by buyers subject to bouts with irrational exuberance. If lenders start accepting appraisals where the income approach contains adjustments to value that increase the appraised amount 100%–something that would have been required to justify pricing seen during the Great Housing bubble–then the system is hopelessly broken. The main argument for using the income approach is that its basis is the fundamental value whereas the basis for the comparative-sales approach is whatever price the market will currently bear. Prices are not likely to decline below a properties fundamental value where as a property may decline significantly from a point-in-time estimate of market value. Using the income approach lessens the risk to lenders and investors and ensures the smooth operation of the secondary mortgage market. Using the comparative-sales approach exclusively results in the turmoil witnessed during the price decline of the Great Housing Bubble.


Japan endured 15 years of slow deflation from the combined stock market and real estate bubbles of the late 1980s. The 1990s are known in Japan as “the lost decade” due to the problems from the slow deflation of their asset bubble.

In July of 2008, the Fed made changes to Reg Z which would have been helpful in reducing the size of the housing bubble, the amount of fraud during the bubble, and the resulting pain of the bust. Unfortunately, they were at least five years too late. The changes to Reg Z were: The rule, for “higher-priced loans: 1. Prohibits a lender from making a loan without regard to borrowers' ability to repay the loan from income and assets other than the home's value. A lender complies, in part, by assessing repayment ability based on the highest scheduled payment in the first seven years of the loan. To show that a lender violated this prohibition, a borrower does not need to demonstrate that it is part of a "pattern or practice. 2. Prohibits a lender from relying on income or assets that it does not verify to determine repayment ability. 3. Bans any prepayment penalty if the payment can change during the initial four years. For other higher-priced loans, a prepayment penalty period cannot last for more than two years. 4.Requires that the lender establish an escrow account for the payment of property taxes and homeowners' insurance for first-lien loans. The lender may offer the borrower the opportunity to cancel the escrow account after one year. The rule, for all closed-end mortgages secured by a consumer's principal dwelling: 1. Prohibits certain servicing practices: failing to credit a payment to a consumer’s account as of the date the payment is received, failing to provide a payoff statement within a reasonable period of time, and "pyramiding" late fees. 2. Prohibits a creditor or broker from coercing or encouraging an appraiser to misrepresent the value of a home. 3. Creditors must provide a good faith estimate of the loan costs, including a schedule of payments, within three days after a consumer applies for any mortgage loan secured by a consumer's principal dwelling, such as a home improvement loan or a loan to refinance an existing loan. The rule, for all mortgages: Requires advertising to contain additional information about rates, monthly payments, and other loan features. The rule also bans seven deceptive or misleading advertising practices, including representing that a rate or payment is "fixed" when it can change. “

[iii] In their paper Predicting Bubbles and Bubble Substitutes (Thompson, Treussard, & Hickson, 2004), the authors contend that certain kinds of bubble intentionally created by government authorities can have positive long-term effects.

[iv] The subprime mortgage industry may mount a comeback in the aftermath of the Great Housing Bubble. The original business plan was to take borrowers who had good incomes and savings to put toward a downpayment, but they had low FICO scores which prevented them from getting a Prime loan. These borrowers used subprime as bridge financing until their FICO scores improved and they could refinance into Prime loans. The subprime business plan relied on capacity (income) and collateral (downpayment) to make up for the lack of good credit. Those who go through foreclosure in the bubble will end up with bad credit, but they may have good income and savings. They will be an underserved borrower class that will likely prompt resurgence in subprime lending. The problem with subprime was not that the borrowers had poor credit scores; it was that lenders ignored capacity and collateral on the loans. This is why Alt-A and Prime loans also performed poorly when prices deflated. Subprime will likely resurface, whereas Alt-A is permanently defunct.

[v] Much of California’s lingering economic troubles of the early 90s can be linked to diminished consumer spending due to excessive mortgage obligations. Many people inaccurately point to job losses in the aerospace industry as the cause of California’s economic weakness, but this sector was small, and the contraction only lasted a couple of years, whereas the economic slump persisted almost 6 years.

[vi] This is the primary argument against any kind of legislative reform (Wallace, Elliehausen, & Staten, 2005).

[vii] When credit first began to tighten in 2007, the government sponsored entities who insure mortgage loans for sale in the secondary market issued a series of guidelines on the loans they would insure. In the first version, debt-to-income ratios were limited to 50%. In a subsequent revision in late 2007, the debt-to-income ratio was limited to 45%. The tightening of credit was slow enough to keep some transactions occurring in the market, but fast enough to stop underwriters from originating bad loans. As of the time of this writing it is anticipated that the ratio will continue to fall.

[viii] In his groundbreaking work The Black Swan: The Impact of the Highly Improbable (Taleb, 2007), the author describes how unpredictable and dramatic events shape our history.

[ix] There is a great synopsis of the history and calculation of the rental components of the consumer price index contained in the report Treatment of Owner-Occupied Housing in the CPI (Poole, Ptacek, & Verbrugge, 2005).

IHB News 5-26-2010

I hope you are all taking advantage of our perfect weather and enjoying your holiday weekend.

Irvine Home Address … 518 LUMINOUS Irvine, CA 92603

Resale Home Price …… $1,599,000

{book1}

Then as it was, then again it will be

An' though the course may change sometimes

Rivers always reach the sea

Flyin' skys of fortune, each have separate ways

On the wings of maybe, downy birds of prey

Kind of makes me feel sometimes, didn't have to go

But as the eagle leaves the nest, it's got so far to go

Led Zeppelin — Ten Years Gone

Housing Bubble News from Patrick.net

Fri May 28 2010

The Root of the Housing Bubble Remains Unchanged (Charles Hugh Smith)

The Hard Truth About Residential Real Estate (zerohedge.com)

Easy Money, Hard Truths (nytimes.com)

New $3bn Foreclosure Prevention Program Added to Wall Street Reform Bill (209.236.64.240)

How real estate became the new volunteer slavery (theroot.com)

California "Millionaires": Debtors Who Service Over $1,000,000 (irvinehousingblog.com)

Mortgage Rates Fall to 4.8%, House Buyers Still Scarce (blogs.wsj.com)

No Progress in Weekly Unemployment Claims for Five Months (Mish)

Questions To Ask Those Who Believe That Economic Recovery Is Real (theeconomiccollapseblog.com)

Economist says inflation coming due to gov't printing money — gets cut off (dvorak.org)

The Cult of Subprime Central Bankers (huffingtonpost.com)

Bank fails and goes about its business (latimes.com)

Is Australian Housing Market Set to Topple? (moneymorning.com.au)

Sydney property market – a cold wind is blowing (curtisassociates.com.au)

San Francisco gets a taste of the commercial real estate bust (mybudget360.com)

Thousands more in S.F. seek property tax breaks (sfgate.com)

Oklahoma City Hailstorm Meets Poor Construction (stumbleupon.com)

Fun Stock Map Showing Market Values As Areas (finviz.com)

Perfect for the do-it-yourselfer (patrick.net)


Thu May 27 2010

San Francisco's Parkmerced in default (sfgate.com)

Lessons of hard times in Vallejo, CA (latimes.com)

Bank-owned properties alter character of SF East Bay neighborhoods (contracostatimes.com)

Seattle's backyard cottages make a dent in housing need (usatoday.com)

Is South Florida housing rebound a myth? (weblogs.sun-sentinel.com)

House prices overvalued by 14 per cent in Canada (yourhome.ca)

Bad at Math? You're More Likely to Default on Your Mortgage (money.blogs.time.com)

More "Buy Now" spin from the builders (patrick.net)

In a Word, the Problem is "Debt" (timiacono.com)

FHA loans pass Fannie Mae and Freddie Mac in Q1 (doctorhousingbubble.com)

Bill Gross, Robert Mundell say Sovereign Default Likely Inevitable (Mish)

Moodys Reiterates U.S. Spending Risks Credit Rating (bloomberg.com)

Mapping the Mortgage Interest Deduction (economix.blogs.nytimes.com)

Economics and the Nature of Political Crisis (theautomaticearth.blogspot.com)

The Financial Power Elite (monthlyreview.org)

Empty Desks Are Commercial Shadow Inventory (nytimes.com)

Projecting commercial mortgage delinquency trajectory (snl.com)


Wed May 26 2010

House prices drop 0.5 pct. from February to March (google.com)

House prices fall in March (latimes.com)

Southern California rents fall 7 straight months (lansner.freedomblogging.com)

Don't Rule Out a Double Dip Recession (online.wsj.com)

Anyone Still Bullish On Housing Clearly Isn't Paying Attention To Real Numbers (businessinsider.com)

New Jersey Assembly Approves Fresh Bait For Housing Trap (builderonline.com)

Why buying a house today makes little financial sense (mybudget360.com)

Crash is dead ahead. Sell. Get liquid. Now. (marketwatch.com)

Australian Housing Bubble: California Repeated? (scoop.co.nz)

Glut of bank-owned foreclosures means prolonged agony for California governments (contracostatimes.com)

Make the banks pay! Los Angeles Foreclosures Unmaintained (patrick.net)

CA seeks $4.9 billion in new taxes to pay for Prop 13 fiscal damage (sfgate.com)

New database shows $12.2 billion in SF Bay Area public employee salaries (contracostatimes.com)

Private pay shrinks to historic lows as gov't payouts rise (usatoday.com)

Cheap Mortgages: No Boost to Housing (online.barrons.com)

Hey, Mortgage Industry: Nobody Trusts You (blogs.wsj.com)

'Bailout psychology' destroying the economy (old but good – sfgate.com)

They got away with it: U.S. drops criminal probe of AIG executives (reuters.com)

Roubini: A Crash Course in the Future of Finance (c-spanvideo.org)

Customer stuck with counterfeit cash from post office (US stuck with counterfeits from Fed) (latimes.com)


Tue May 25 2010

Suppressing the Cognitive Dissonance of a Bogus Recovery (Charles Hugh Smith)

Existing House Sales Rise in April, but Inventory Soars (theatlantic.com)

Rising house sales likely to cool despite low rates (finance.yahoo.com)

Strategic Defaults Are Endangering Dead Real Estate Market (nuwireinvestor.com)

Utah's foreclosure crisis: Worst lurks ahead (sltrib.com)

FHA House-Financing Volume Sign of "Very Sick System" (businessweek.com)

Broke, USA: From Pawnshops to Poverty Inc. (businessweek.com)

Insanity Down Under: "Paying Principal on Mortgage Loans is Unnecessary" (Mish)

Can China avoid a real estate bubble burst? (csmonitor.com)

Federal government is trying to reinflate house prices (seekingalpha.com)

U.S. Federal Reserve Meeting Minutes for April 28 (bloomberg.com)

Defaults on Apartment-Building Loans Set Record for U.S. Banks (bloomberg.com)

Obama Versus the Corporations (nytimes.com)

New rule says banks must prove ownership before foreclosing (New rule?) (miamiherald.com)

US Leading Indicators drop in sign recovery to cool (smh.com.au)


Mon May 24 2010

Ignoring mortgage debt for fun and profit (articles.moneycentral.msn.com)

What kind of houseowners choose to default? (latimes.com)

Owner-investors ponder walking away (nctimes.com)

Mortgage Delinquency Rate vs. Unemployment Rate Graphed (calculatedriskblog.com)

Lenders expected to sue houseowners for repayment of mortgage debt (sun-sentinel.com)

East SF Bay town going after deadbeat banks to end foreclosure blight (contracostatimes.com)

Fewer would buy repo'd house vs. a year ago (mortgage.freedomblogging.com)

Principal-Protected Notes Aren't as Safe as They Sound (nytimes.com)

How Allen Stanford is worse than Madoff (money.cnn.com)

9 Southern California men charged with operating foreclosure-relief scam (latimes.com)

Foreclosure scam's mastermind gets 46 years in prison (signonsandiego.com)

The Challenge of Closing Tax Loopholes For Billionaires (robertreich.org)

Gates's Dad Says Rich Arent Paying Fair Share Taxes (bloomberg.com)

Fisher Island, haven of the rich, experiences dose of reality (miamiherald.com)

Slouching Towards Neofeudalism (huffingtonpost.com)

Padded Pensions Add to New York's Fiscal Woes (nytimes.com)

The Crippling Price of Public Employee Unions (usnews.com)

Economic Seer Says U.S. Not Addressing Real Cause of Crisis (time.com)

Today's featured debtor

  • Today's featured property was purchased for $1,830,000 on 12/1/2005. The owner used a $1,464,940 Option ARM with a 2.4% teaser rate, a $183,117 HELOC and a $181,943 down payment.
  • On 4/4/2006, Wells Fargo refinanced them with a $1,600,000 first mortgage and a $60,000 HELOC.
  • On 8/22/2006 Washington Mutual gave them a $229,790 HELOC. I suspect this foreclosure will go through because Wells will not mind blowing WAMU's second out.
  • Total property debt is $1,829,790. Basically, the buy withdrew his down payment with refinances.
  • He quit paying lat last year or perhaps in January of this year.

Foreclosure Record

Recording Date: 04/02/2010

Document Type: Notice of Default

Irvine Home Address … 518 LUMINOUS Irvine, CA 92603

Resale Home Price … $1,599,000

Home Purchase Price … $1,830,000

Home Purchase Date …. 12/1/2005

Net Gain (Loss) ………. $(326,940)

Percent Change ………. -12.6%

Annual Appreciation … -3.0%

Cost of Ownership

————————————————-

$1,599,000 ………. Asking Price

$319,800 ………. 20% Down Conventional

4.94% …………… Mortgage Interest Rate

$1,279,200 ………. 30-Year Mortgage

$328,831 ………. Income Requirement

$6,820 ………. Monthly Mortgage Payment

$1386 ………. Property Tax

$417 ………. Special Taxes and Levies (Mello Roos)

$133 ………. Homeowners Insurance

$252 ………. Homeowners Association Fees

============================================

$9,008 ………. Monthly Cash Outlays

-$1541 ………. Tax Savings (% of Interest and Property Tax)

-$1554 ………. Equity Hidden in Payment

$611 ………. Lost Income to Down Payment (net of taxes)

$200 ………. Maintenance and Replacement Reserves

============================================

$6,724 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$15,990 ………. Furnishing and Move In @1%

$15,990 ………. Closing Costs @1%

$12,792 ………… Interest Points @1% of Loan

$319,800 ………. Down Payment

============================================

$364,572 ………. Total Cash Costs

$103,000 ………… Emergency Cash Reserves

============================================

$467,572 ………. Total Savings Needed

Property Details for 518 LUMINOUS Irvine, CA 92603

——————————————————————————

Beds: 5

Baths: 0005

Home size: 3792

($422 / sq ft)

Lot Size: 5535

Year Built: 2005

Days on Market: 14

Listing Updated: 40315

MLS Number: S616510

Property Type: Single Family, Residential

Community: Quail Hill

——————————————————————————

Customized Tuscan estate w/ almost 4000 s. f. w/ 5BRs, 4.5BAs(including a separate casita) on the top street single-loaded street w/ drop-dead panoramic mountain, hills, valley, city lights & sunset views w/ distinctive builder and seller upgrades. 3-car att. gar. w/ epoxy flooring & custom cabinetry. Formal living & dining; Great rm w/ custom fireplace w/ pre-cast mantle, hearth & media niche; French doors open out to private loggia; gourmet kitchen w/ center island, GE Monogram Professional Series stainless steel appliances inc. gas cook-top, double ovens, microwave & built-in refrigerator ~ granite countertops with full backsplash; Opulent master bedroom with 10 ceiling plus retreat ~ French doors out to huge deck w/ phenomenal views; luxurious MBA replete w/ large soaking tub, separate shower, dual vanities & dual walk-in wardrobes; Professionally landscaped and hardscaped front, rear & side yards w/ blt-in BBQ & fountain; award-winning Alderwood Basics+ elem. & University HS; resort-style amenities

The Speculative Housing Bubble Mentality Still Governs the Market

The underlying mechanisms for inflating housing bubbles still exist, and the buyer mentality that inflated it still dominates the market. Only lender prudence prevents another housing bubble.

Irvine Home Address … 241 GREENMOOR Irvine, CA 92614

Resale Home Price …… $995,950

{book1}

Nobody asked for life to deal us

With these bullshit hands we're dealt

We have to take these cards ourselves

And flip them, don't expect no help

Now I could have either just

Sat on my ass and pissed and moaned

But take this situation in which I'm placed in

And get up and get my own

Eminem — Beautiful

The housing bubble and the kool aid mindset it spawned has been very disruptive to American life. Large segments of our population are addicted to Ponzi finance, and the prudent are being robbed to pay for the mistakes of the Ponzis. I find the IHB is an outlet for the frustrations with the insanity being inflicted upon us all. The sad part is how little has been done to correct the mistakes. We will do this again.

The Root of the Housing Bubble Remains Unchanged

Charles Hugh Smith (May 27, 2010)

The fundamental root of the housing bubble–the collusion of the Central State and banks to extend home ownership to millions of citizens who did not qualify for that burden– remains firmly in place.

The Federal government continues to pour tens of billions of dollars into … subsidies to Fannie Mae, Freddie Mac and FHA. Mortgage lenders have been delighted to write mortgages in our completely nationalized market in which the government backs literally 99% of all mortgages and the Federal Reserve bought $1.2 trillion in mortgages that no sane private investor would touch.

Fannie Mae seeks $8.4 billion from government after loss: Fannie Mae, the largest U.S. residential mortgage funds provider, on Monday asked the government for an additional $8.4 billion after the company lost $13.1 billion in the first quarter.

Because of current trends in housing and financial markets, Fannie Mae expects to continue having a net worth deficit in future periods and to need to tap more funding from the Treasury.

"Promoting sustainable homeownership and maintaining ready access to liquidity are our guiding principles in serving the residential markets," said Michael Williams, the firm's chief executive.

The government has relied heavily on both companies, which buy mortgages from lenders to stimulate more lending, to stabilize the housing market.

In other words, the housing market would collapse without this massive Federal support, and there is no end to the losses this subsidy will require. Propping up the nation's fundamnetally insolvent housing market is truly a financial black hole.

The props to the housing market provided by the GSEs and FHA are a direct transfer of losses from banks to the Federal Government just like loan modification programs. Whether it stablizes the market or not is yet to be seen. The fact that lenders are being bailed out of future losses is certain. Losses from 2009 and 2010 vintage loans will all be covered by the US Taxpayer.

Meanwhile, the default rate on low-down-payment FHA loans is a staggering 20% on loans written in 2008–after the housing bust had already unfolded and the risk was undeniable: F.H.A. Problems Raising Concern of Policy Makers:

F.H.A. commissioner, David H. Stevens, acknowledged that some 20 percent of F.H.A. loans insured last year — and as many as 24 percent of those from 2007 — faced serious problems including foreclosure.

The Federal government has thus shown that it is so committed to propping up an unsustainable policy and housing market that it is ready to write off 1 in every 4 mortgages within a year of origination.

The problem with that willingness to absorb risk for the sake of incentivizing borrowing for home ownership is that next year another 20% will default, and then the following year another 20% will default, and by year Five the vast majority of those loans backed by FHA will be in default.

The theory is that the FHA buying will become the support the market needs to put in a durable bottom and prevent the 20% default year after year. It might work — if kool aid intoxication can form a durable bottom.

I have always stated it takes cashflow investors with a genuine reason to buy (outside of kool aid intoxication) to bring enough buyers to the market to stabilize pricing. The government has changed the dynamics of the trade. Instead of waiting for cashflow valuations to prompt buyers, the government is handing out 3.5% down payment mortgages and allowing people to take speculative option positions for little cost. The program does not entice cashflow buyers who will withstand a decline in price, it seduces the kool aid intoxicated who will bail if their position moves against them.

FHA Facing "Cataclysmic" Default Rates:

The Federal Housing Administration (FHA) has guaranteed about 25% of all new U.S. mortgages written in 2009, up from just 2% in 2005.

The key phrase here is "borrowing," not "home ownership." The key feature of State support of housing is not legitimate "home ownership," it is the enabling of massive new sources of income and transactional churn for lenders and Wall Street loan and derivatives packagers.

Home "ownership" when there is no equity in the purchase and no equity being built via principal payments is a simulacrum of ownership.

I wrote about this phenomenon in Money Rentership: Housing and the New American Dream. "Since lenders behave like owners of a borrower's real estate, and since lenders have right to force sale if a borrower defaults, lenders are owners, and owners are money renters." A property with no equity position is renting; it is either renting money or renting property. Renting money feels better because at least their is hope of free money later through appreciation.

If a buyer puts almost no money into the purchase–even now, FHA and VA loans can be had with a mere 3% down payment–and the loan is of the interest-only or adustable-rate (ARM) variety favored during the housing bubble's heyday, then there is no principal payment being made and thus no equity being built.

These "buyers" don't "own" anything; all they're doing is renting the money in the hopes that rising home prices will create equity for them out of thin air. What they "own" is essentially an option on a property which they "rent" monthly. If the government manages to reinflate the housing bubble (it won't, but hope and greed spring eternal), then the option will pay off handsomely. The "owner" put no money into the speculative bet, but they can then sell their option for a huge profit.

If housing plummets, then the "bet" was lost. But since "renting" the mortgage didn't cost much more than renting a real house, and there was no capital at risk, then the downside is modest indeed.

The author is aptly describing Mortgages as Options. "Mortgages took on the characteristics of options contracts in the Great Housing Bubble. Speculators utilized 100% financing and Option ARMs with low teaser rates to minimize the acquisition and holding costs of a particular property. The small amount they were paying was the “call premium” they were providing the lender. If prices went up, the speculator got to keep all the gains from appreciation, and if prices went down, the speculator could simply walk away from the mortgage and only lose the cost of the payments made, particularly when this debt was a non-recourse, purchase-money mortgage. Another method speculators and homeowners alike used was the “put” option refinance. Late in the bubble when prices were near their peak, many homeowners refinanced their properties and took out 100% of the equity in their homes. In the process, they were buying a “put” from the lender: if prices went down (which they did,) they already had the sales proceeds as if they had actually sold the property at the peak; if prices went up, they got to keep those profits as well. The only price for this “put” option was the small increase in monthly payments they had to make on the large sum they refinanced. If fact, on a relative cost basis, the premium charged to these speculators and homeowners was a small fraction of the premiums similar options cost on stocks."

In other words, heavily subsidized mortgages at low rates with little money down incentivizes not home "ownership" but speculation in credit-based bubbles.

In the "old days" (circa 1994), the expectation was that equity would be built by paying off the mortgage principal over time. Equity was a result of reducing the mortgage due, not the result of speculative gambling on future asset bubbles.

I wrote about the Ponzis all week. The defining characteristic of housing bubble Ponzis is their belief that income and wealth come with no sacrifice or effort. Free money is showered upon those who speculate by purchasing residential real estate. They don't need to save or be frugal; they obtain all their entitlements through borrowed money rather than industrious contribution to society.

The key feature of middle class wealth is thrift, not massive leveraged debt. What Washington and its financial Power Elite partners presented as "the road to middle class wealth" was in fact a mere chimera, a simulacrum of the road to middle class wealth. That road is fiscal prudence and thrift.

Immigrants have prospered in the U.S. for generations because they were thrifty and sacrificed for their children by sweating blood to save money for college educations and for 20% down payments on homes. They did not prosper by snagging Central State supported mortgages with no down payment on homes they could not afford under any prudent calculation of risk.

From this point of view, the entire "home ownership is for everyone" policy was a gigantic fraud, a con job sold to an American public greedy for a short-cut to middle class wealth. The bankers and the Central State government both profited immensely, as the bankers and Wall Street minted tens of billions in profits off the mortgage machine and its derivative spin-offs, and the government (at all levels, Federal, state and local) gorged on billions of dollars in transfer fees, capital gains taxes and the sales taxes on all the gewgaws home "owners" bought to fill up their new McMansions.

The California Economy Is Dependent Upon Ponzi Borrowers. The transition from a Ponzi economy to a thrift economy will be painful, and the economic malaise will drag on for quite some time.

Today's featured owner spent $360,000 of his middle class wealth

  • Today's featured property was purchased on 6/27/2000 for $610,000. The owners used a $610,000 loan according to my records. It is unusual to see a 100% first mortgage, particularly in 2000.
  • Kool aid did not seduce them until late. On 1/27/2005 they refinanced with a $595,000 first mortgage and a $100,000 HELOC. To this point, the owners were still paying down their mortgage. Apparently, that HELOC got them going.
  • On 9/13/2005 they opened a HELOC for $200,000.
  • On 12/21/2005 the wife borrows $250,000 in a stand-alone second.
  • On 6/29/2006, the couple refinanced with a $900,000 Option ARM with a 2.5% teaser rate.
  • On 8/3/2006, they obtained a $70,000 HELOC.
  • Total property debt is $970,000 plus negative amortization.
  • Total mortgage equity withdrawal is $360,000.
  • They have been squatting since late last year.

Foreclosure Record

Recording Date: 02/09/2010

Document Type: Notice of Default

Debt destruction or wage inflation are the answers

I believe only two reasonable solutions to this problem exist; either the debt gets destroyed through bank write-offs and debt destruction, or workers see massive wage inflation to make the debt affordable.

I have seen many articles suggesting that inflation is the cure, but that isn't accurate. Price inflation in the absence of wage inflation merely lowers everyone's standard of living and would cause widespread debt destruction as the over-burdened are crushed. Wage inflation without price inflation would be a miraculous panacea; house prices could get pushed back up to peak levels, and borrowers would still have disposible income without HELOC borrowing. With massive unemployment, wage inflation does not look iminent, and without it, debt destruction becomes the only viable option.

Short term, expect to see a great deal of squatting while the lenders remain in denial.

Irvine Home Address … 241 GREENMOOR Irvine, CA 92614

Resale Home Price … $995,950

Home Purchase Price … $610,000

Home Purchase Date …. 6/27/2000

Net Gain (Loss) ………. $326,193

Percent Change ………. 63.3%

Annual Appreciation … 5.0%

Cost of Ownership

————————————————-

$995,950 ………. Asking Price

$199,190 ………. 20% Down Conventional

4.94% …………… Mortgage Interest Rate

$796,760 ………. 30-Year Mortgage

$204,815 ………. Income Requirement

$4,248 ………. Monthly Mortgage Payment

$863 ………. Property Tax

$0 ………. Special Taxes and Levies (Mello Roos)

$83 ………. Homeowners Insurance

$78 ………. Homeowners Association Fees

============================================

$5,272 ………. Monthly Cash Outlays

-$1036 ………. Tax Savings (% of Interest and Property Tax)

-$968 ………. Equity Hidden in Payment

$381 ………. Lost Income to Down Payment (net of taxes)

$124 ………. Maintenance and Replacement Reserves

============================================

$3,774 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$9,960 ………. Furnishing and Move In @1%

$9,960 ………. Closing Costs @1%

$7,968 ………… Interest Points @1% of Loan

$199,190 ………. Down Payment

============================================

$227,077 ………. Total Cash Costs

$57,800 ………… Emergency Cash Reserves

============================================

$284,877 ………. Total Savings Needed

Property Details for 241 GREENMOOR Irvine, CA 92614

——————————————————————————

Beds: 4

Baths: 2 full 1 part baths

Home size: 2,794 sq ft

($356 / sq ft)

Lot Size: 5,500 sq ft

Year Built: 1985

Days on Market: 23

Listing Updated: 40311

MLS Number: P733319

Property Type: Single Family, Residential

Community: Woodbridge

Tract: Othr

——————————————————————————

According to the listing agent, this listing may be a pre-foreclosure or short sale.

This property is in backup or contingent offer status.

Woodbridge is most sought after neighborhood with lots of upgrades. The hard wood floors have been refinished. All the room are very spacious, especially the master with a big walk-in closet. The layout is open, light and airy. Downstairs has dark hardwood floors. Upstairs has new carpet. Partial wall removed between two bedrooms to make a two-rooms suite for our kids, which can be easily replaced, this room also has separate door to the master.Ideal for young children.Inside the loop close to elementary school. Four community swimming pools and tennis courts within two blocks (free access to all Woodbridge residents). The South Lake lagoon is a few blocks away, with sand beaches, swimming, small water slides, picnic areas, and boat rentals. This home is in a fabulous school district in an excellent location.Backyard had a covered Saltillo patio; grass and kids play structure. Children play unit built in back yard. Tennis courts and Community pools nearby.

I hope you have enjoyed this week, and thank you for reading the Irvine Housing Blog: astutely observing the Irvine home market and combating California Kool-Aid since 2006.

Have a great weekend,

Irvine Renter

California Millionaires: Debtors Who Service Over $1,000,000

An accepted Calfornia oxymoron is debt is equal to wealth. Today we take a special look at the lives of debt millionaires.

Irvine Home Address … 29 LOOKOUT Irvine, CA 92620

Resale Home Price …… $1,300,000

{book1}

Some boys kiss me, some boys hug me

I think they’re o.k.

If they don’t give me proper credit

I just walk away

They can beg and they can plead

But they can’t see the light, that’s right

’cause the boy with the cold hard cash

Is always mister right, ’cause we are

Living in a material world

And I am a material girl

You know that we are living in a material world

And I am a material girl

Madonna — Material Girl

Arriving Early

I have noticed that many in California believe the trappings of success are immediate. You get a job, and you lease the BMW. You get a $1,000 a year raise at work, you get an additional $10,000 credit line. You get married, and you borrow $1,000,000 and get your dream home. You have no need to save or wait, you can have it all now. You service the debt for your working life, and you obtain a reverse mortgage to retire on your boundless appreciation. Once you go into debt, you never, ever get out.

To "arrive" in life is to obtain every object of status you desire. Rich people arrive once they have saved enough money to pay cash for a few indulgences. High wage earners arrive once they can prove enough income to service a $1,000,000 debt.

Ponzis are changing the definition of a millionaire. In California debt equals wealth, so a millionaire is someone capable of obtaining and servicing a $1,000,000 debt. A million dollars in debt makes you rich.

I cannot fathom what is must be like to feed a beast that large. Right now the debt monster has a low 5% appetite, but what will those adjustable rate mortgages feel like when rates go up? To paraphrase and parody Irving Fisher, perhaps interest rates have reached what looks like a permanently low floor.

Irvine properties in default on $1,000,000+ mortgages

The following list of addresses are in default on mortgages over $1,000,000.

Address

Value

Loan Balance

SaleDate

Published Bid

59 GRANDVIEW $ 2,975,376 $ 3,350,000 6/9/2010 $ 3,542,938
65 GRANDVIEW $ 3,018,675 $ 3,556,567 5/28/2010 $ 3,351,639
1672 REYNOLDS AVE $ 1,924,306 $ 7,170,000 9/10/2010 $ 2,570,000
27 STARVIEW $ 2,149,100 $ 2,990,000 7/7/2010 $ 2,361,129
58 CEZANNE $ 1,339,060 $ 2,250,000 6/16/2010 $ 2,186,850
136 STARCREST $ 1,369,470 $ 3,900,000 7/19/2010 $ 2,119,577
31 VILLAGE WAY $ 1,842,061 $ 2,485,750 7/6/2010 $ 2,089,102
17801 CARTWRIGHT RD 250 $ 3,036,374 $ 3,487,500 6/10/2010 $ 1,981,419
8871 RESEARCH DR $ 2,788,321 $ 3,609,000 9/1/2010 $ 1,980,000
51 CEZANNE $ 1,549,068 $ 3,770,000 6/7/2010 $ 1,939,524
28 SYLVAN $ 1,739,418 $ 1,810,000 6/28/2010 $ 1,851,139
23 CLOUDS PT $ 1,617,945 $ 3,550,000 7/2/2010 $ 1,800,000
35 TRIPLE LEAF $ 1,128,734 $ 1,726,660 6/3/2010 $ 1,725,079
24 ROSE TRELLIS $ 1,212,019 $ 282,800 6/10/2010 $ 1,693,240
27 MOMENTO $ 1,794,521 $ 1,800,700 5/27/2010 $ 1,652,288
24 PISMO BCH $ 1,432,305 $ 1,700,000 5/27/2010 $ 1,644,278
23 SHADY LN $ 1,393,233 $ 1,990,000 7/28/2010 $ 1,600,000
33 TALL HEDGE $ 1,553,769 $ 2,836,709 6/3/2010 $ 1,563,247
29 ANTIQUE ROSE $ 1,127,091 $ 1,630,000 6/10/2010 $ 1,504,574
29 LILY POOL $ 1,218,079 $ 1,470,000 6/10/2010 $ 1,484,931
16500 ASTON $ 1,200,270 $ 2,916,000 8/13/2010 $ 1,458,000
11 GAVIOTA $ 1,520,671 $ 6,652,937 5/27/2010 $ 1,411,878
7 BUELLTON $ 1,179,546 $ 1,426,000 6/8/2010 $ 1,327,302
101 LATTICE $ 1,188,392 $ 1,104,000 6/10/2010 $ 1,322,836
24 TWIGGS $ 1,181,325 $ 1,529,800 6/1/2010 $ 1,301,968
3131 MICHELSON DR 1702 $ 1,276,361 $ 1,226,600 6/3/2010 $ 1,295,430
109 LATTICE $ 1,218,342 $ 1,282,500 5/28/2010 $ 1,270,512
20 ROSE TRELLIS $ 1,294,508 $ 1,883,023 6/16/2010 $ 1,267,500
24 ARBORWOOD $ 1,092,891 $ 1,428,000 6/18/2010 $ 1,228,000
22 FAITH $ 1,194,303 $ 2,650,000 6/4/2010 $ 1,223,705
40 DESERT WILLOW $ 964,519 $ 1,175,420 6/24/2010 $ 1,205,941
15 PASO ROBLES $ 1,219,922 $ 1,346,250 6/10/2010 $ 1,205,837
9 OLYMPUS $ 1,520,417 $ 1,200,000 7/10/2010 $ 1,200,000
103 RETREAT $ 1,200,302 $ 1,620,000 6/22/2010 $ 1,196,779
152 TAPESTRY $ 982,692 $ 956,250 6/14/2010 $ 1,183,656
23 WALNUT CRK $ 1,162,055 $ 1,247,467 6/9/2010 $ 1,153,285
39 CRIMSON ROSE $ 1,340,634 $ 1,760,000 6/2/2010 $ 1,089,990
28 CRIMSON ROSE $ 1,250,228 $ 1,530,000 5/27/2010 $ 1,088,739
147 TAPESTRY $ 1,183,862 $ 1,341,000 6/21/2010 $ 1,088,509
16480 BAKE PKWY $ 1,689,903 $ 1,946,700 6/30/2010 $ 1,081,500
5 BAYPORTE $ 1,060,316 $ 1,347,500 6/16/2010 $ 1,079,174
41 MOJAVE $ 1,248,973 $ 1,080,000 6/21/2010 $ 1,062,837
129 LATTICE $ 1,071,133 $ 1,000,000 6/10/2010 $ 1,062,797
29 LOOKOUT $ 1,248,257 $ 1,048,000 5/29/2010 $ 1,048,000
59 BAMBOO $ 857,115 $ 1,601,000 6/14/2010 $ 1,043,759
19 PETRIA $ 930,592 $ 1,080,000 6/7/2010 $ 1,034,881
8083 SCHOLARSHIP $ 1,313,197 $ 2,595,000 6/28/2010 $ 1,033,331
29 PASO ROBLES $ 1,395,677 $ 2,010,000 6/3/2010 $ 1,018,865
20 VILLAGER $ 1,018,786 $ 952,000 6/14/2010 $ 1,006,757
36 PRAIRIE $ 1,266,928 $ 1,401,486 6/22/2010 $ 1,000,000
20 TOPIARY $ 1,531,562 $ 1,704,347 7/29/2010 $ 999,950
12 GALAXY 24 $ 861,094 $ 1,062,000 6/11/2010 $ 988,749
20 BRIGADIER $ 1,824,777 $ 1,880,000 6/29/2010 $ 980,000
31 SHEPARD $ 1,148,118 $ 1,366,000 8/21/2010 $ 966,000
40 VACAVILLE $ 899,371 $ 1,289,880 7/16/2010 $ 960,000
13645 ALTON PKWY A $ 1,099,580 $ 2,047,000 5/27/2010 $ 899,679
18971 GLENMONT TER $ 1,064,859 $ 1,091,800 6/28/2010 $ 895,949
64 ROCKPORT $ 808,905 $ 1,026,000 6/2/2010 $ 872,698
2 HICKORY TREE LN $ 897,980 $ 1,102,900 6/10/2010 $ 863,428
5502 SIERRA ROJA RD $ 955,606 $ 1,375,250 6/2/2010 $ 818,490
6052 SIERRA SIENA RD $ 1,029,837 $ 1,000,800 6/10/2010 $ 801,982
46 WHITFORD $ 831,784 $ 1,016,000 7/24/2010 $ 791,000
17752 FITCH $ 2,752,146 $ 2,216,657 8/18/2010 $ 750,000
18 HIDDEN CRK $ 1,330,028 $ 1,911,641 7/20/2010 $ 200,000

This list barely scratches the surface on the problems stemming from the lack of a jumbo loan market. For example, only 6 homes in Irvine with an estimated value over the conforming limit of $729,750 went through foreclosure last month. There are 146 in pre-foreclosure or scheduled for auction. In Orange County, there are 2,046 in the foreclosure process over the conforming limit, and only 101 foreclosure sales.

Also, since banks know the jumbo market is hopeless, fewer of these homes have been served notice. The shadow inventory of squatters with huge loans is bigger than the banks are willing to face.

Shadow Inventory's Shadow

It isn't only the distress we see that feeds into the problems with housing. Visible inventory includes the properties on ForeclosureRadar.com on which there has been some filings. Shadow Inventory includes those properties where the owners are not making payments but the bank has not begun foreclosure proceedings. Shadow inventory's shadow includes all the Ponzis who are not currently behind on their mortgage payments but are completely dependant upon increasing debt in order to survive. The people in Shadow inventory's shadow living the life of a Ponzi will implode before this debacle is truly behind us.

Over the last few weeks, I have collected a few stories about Ponzis living in shadow inventory's shadow. The names and circumstances have been changed, but the essential facts of the following stories are true.

Property ladder to oblivion

One family lived in a 1,500 SF 3/2 in a comfortable area of Irvine. They HELOCed about $200,000 out of their property, but they still sold it in 2006 for a hefty profit and a check for $250,000 of remaining equity. They took this $250,000 and put it down on a $1,100,000 dream home. They now have an $800,000 interest-only mortgage. The husband is a sole breadwinner whose based salary is about $120,000 a year.

This family is treading water after borrowing 6.6 times their income. Unless or until house prices go back up and they are able to access HELOC money like they used to in their old house, they will not make it. In 2016, their $800,000 mortgage will amortize over 20 years, and their payment will go sky high. Of course, their plan is to refinance the $800,000 debt in 2016, probably with another interest-only loan. They cannot afford their house, but they pay the huge rent on money to stay there. They do not show up in statistics on shadow inventory, but they are doomed.

Baby on the way

One family bought a small home in a really expensive market in 2005. They put $100,000 down, and they have a $950,000 mortgage which is now underwater. The husbands job is secure, but the wife is pregnant and wants to quit work when the baby is born. She can't afford to. Because of their house loan, she must work to make ends meet. The HELOC money they were counting on to renovate the house and substitute for her wage income is not forthcoming. They are trapped and unhappy. They may not be doomed to lose the house, but keeping it is ruining their family life and future plans. They are very house poor.

Side business suffers

One family bought an ocean view property in 2004 for about $1,100,000. Two years later, they sink several hundred thousand into a renovation, and they refinance with a $1,400,000 Option ARM. The property would currently sell for about $1,000,000.

When they took out the Option ARM, the man had a base salary of $120,000 per year, and he was running a side business making about $100,000 — or so he said on his loan application. The side business dried up during the recession, so they have drained all savings and tapped their other credit lines to keep making the minimum payment on their Option ARM. The only way these people survive is another infusion of borrowed money or the side business coming back. Even then, their prospects are bleak. Their real hope was for the housing ATM machine.

I need that bonus

Many people spend like drunken sailors running up huge credit card bills and pay them off with yearly bonuses. Over the last two years, one family received no bonus which used to be almost 50% of the husbands take-home pay. The lack of a bonus did nothing to curb their spending. They are paying the bills on their $1,300,000 mansion, taking vacations, and generally continuing to spend in a conspicuous manner. So far they have managed on increasing credit card balances.

Perhaps they believe big bonuses are in the future, perhaps they think the housing ATM will save them, or perhaps they are simply committed to living as Ponzis until their creditors cut them off. Either way, it doesn't seem likely they will sustain ownership even when the bonus money comes in.

None of the people I described above appear on any measure of housing distress, but given their situations, most of them will not make in through the next five years in their homes. Financial distress will cause them to sell and move.

Who will take their place?

The Ponzis are far more common than frugal savers with huge down payments and high incomes. Heavy cash buyers are common in Irvine's market, not because there are so many of them, but because they are the only ones capable of paying our still inflated prices. Because there are more Ponzis than frugal replacements, there will be more Ponzi homes coming to market than the frugal buyers can absorb. Lenders know this. They are restricting inventory as long as they can hoping that somehow the Ponzis will get bailed out and the banks will have someone to sell their houses to. So far denial and inaction has worked out well for the banks — unless you count the loss of income from all those squatters….

Today's would-be millionaire couldn't cut it

The owner of today's featured property used his million dollar loan and a substantial down payment to acquire the property. Unfortunately, his reach exceeded his grasp.

Today's featured property was purchased on 11/16/2006 for $1,478,000. The first mortgage is $1,048,000 and the owner used a $430,000 down payment. The current asking price. would yield him about $180,000 out of the $430,000 he put down. I question whether he will get the asking price. Not much is selling at these price points.

Irvine Home Address … 29 LOOKOUT Irvine, CA 92620

Resale Home Price … $1,300,000

Home Purchase Price … $1,478,000

Home Purchase Date …. 11/16/2006

Net Gain (Loss) ………. $(256,000)

Percent Change ………. -12.0%

Annual Appreciation … -3.4%

Cost of Ownership

————————————————-

$1,300,000 ………. Asking Price

$260,000 ………. 20% Down Conventional

4.94% …………… Mortgage Interest Rate

$1,040,000 ………. 30-Year Mortgage

$267,342 ………. Income Requirement

$5,545 ………. Monthly Mortgage Payment

$1127 ………. Property Tax

$450 ………. Special Taxes and Levies (Mello Roos)

$108 ………. Homeowners Insurance

$105 ………. Homeowners Association Fees

============================================

$7,335 ………. Monthly Cash Outlays

-$1468 ………. Tax Savings (% of Interest and Property Tax)

-$1264 ………. Equity Hidden in Payment

$497 ………. Lost Income to Down Payment (net of taxes)

$163 ………. Maintenance and Replacement Reserves

============================================

$5,263 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$13,000 ………. Furnishing and Move In @1%

$13,000 ………. Closing Costs @1%

$10,400 ………… Interest Points @1% of Loan

$260,000 ………. Down Payment

============================================

$296,400 ………. Total Cash Costs

$80,600 ………… Emergency Cash Reserves

============================================

$377,000 ………. Total Savings Needed

Property Details for 29 LOOKOUT Irvine, CA 92620

——————————————————————————

Beds: 6

Baths: 6 full 1 part baths

Home size: 3,500 sq ft

($371 / sq ft)

Lot Size: 5,300 sq ft

Year Built: 2007

Days on Market: 16

Listing Updated: 40318

MLS Number: P734262

Property Type: Single Family, Residential

Community: Woodbury

Tract: Wdmf

——————————————————————————

3,500 sq2 house with 6 bedrooms, 6 1/2 baths, marble floor, granite countertop and island, fully landscaped and hardscaped, gorgeous conditions, more than $100,000 upgrade w/ backyard barbecue island for family entertainment.

Do you know anyone living in shadow inventory's shadow?